Research Intern, Jindal Centre for Global South
Jindal School of International Affairs
O.P. Jindal Global University, India.
Economic Outlook in GCC
2021 saw the highly transmissible Delta variant of the SARS CoV-2 raise the COVID-19 death toll to nearly 5 million and ultimately halt any path to economic stability that the world was hoping for. In regions of the Gulf Cooperation Council (GCC), the new variants of the Covid-19 virus transmission created major supply-chain disruptions that led to major policy-trade-off scenarios. This has caused plans of expansion by financial institutions and globalised investments in the GCC, to be temporarily halted. This, combined with the global oil price collapse, has led to a sharp decline in government revenue and imposed challenges in financing development opportunities, for the GCC countries.
However, this is not reflected in the World Economic Outlook Projections by the International Monetary Fund (IMF) (World economic outlook update, 2022), which shows stable 4.1 per cent growth in output in the Middle East and Central Asia in 2021 and 2022, and Saudi Arabia showing a 2 per cent change in growth rate between 2021 and 2022.
In 2020, the GCC countries took lesser shock with a GDP contraction of only 4.8per cent compared to most of the other developing nations in Central and far-East Asia. The GCC economies were able to comparatively overcome the worldwide downturn through a rapid vaccination program that was then followed by booster campaigns. According to a Reuters economist poll in January of 2022, all six economies in the Gulf Cooperation Council are expected to grow faster this year than originally forecasted (Hussain, M. M., 2022). This is due to the record-high climb of crude oil prices which currently stands at USD 2.81 per barrel (as of 22nd February 2022) and escalating global political tensions involving major producers including the United Arab Emirates (UAE) and Russia. Saudi Arabia was predicted to receive growth of 5.7 per cent, followed by Kuwait and UAE with 5.3 per cent and 4.8 per cent respectively.
However, despite this forecasted growth, there is an underlying narrative of the obstacles that lie ahead for the GCC and its ability to maintain international competitiveness and be part of a new global progression. To understand this, we shall analyse some of the key challenges faced by the GCC in its developmental financing program.
Development Financing and GCC
Understanding development finance as a concept is imperative and a prerequisite. According to the Council of Development Finance Agencies (CDFA, 1982), “Development finance is the efforts of local communities to support, encourage and catalyse expansion through public and private investment in physical development, redevelopment and/or business and industry.” This effectively points to the long-term development of any community through investing in a development project that materializes long-term gain for that community. By leveraging public resources, development finance aims to address some of the challenges faced by businesses, investors, and developers.
One of the first and foremost challenges faced by the GCC in its development financing commitments is its high revenue reliance on oil exports. For the past 2 decades, the economic output and growth in the GCC have been primarily driven by its oil exports. Saudi Arabia, the world’s largest crude oil exporter and dubbed as the ‘economic and political titan’, is expected to see a 5.7 per cent economic growth in 2022. The UAE, the second-largest economy of the GCC and a global trade hub, is forecasted to grow at a rate of 4 percent. However, there is a clear warning sign in these forecasts that any disruptions in prices due to geopolitical instability can result in a complete re-work of these numbers. The level of dependency on these oil prices for government revenue determination, reflects the singular driver of economic growth in the GCC. Despite long-term paper plans of diversification, the same remain unsubstantiated by infrastructure development and integration projects.
A secondary challenge that poses a strain on developmental financing in the GCC is the increased fiscal expenditure constraints of the governments. This occurs due to a two-fold combination of reduced fiscal expenditure budget reserves, combined with increased capital and fiscal spending requirements in these economies. Most GCC countries have segmented their labour markets with limited labour mobility. This reflects skills discrepancy and wage stringencies. Parliamentary tensions of ‘Kuwaitization’ (replacing expatriate labour with Kuwaitis to curb local unemployment) continues to receive backlash in Kuwait due to a lack of demand by nationals to take on lower-skilled jobs. Simultaneously, Kuwait’s fiscal outturns show a 27.5per cent reduction in capital spending in the FY20-21. This amalgamation of circumstances weighs a heavy burden on Kuwait’s wage bill, which is the sum of government spending committed to the salaries and benefits of municipal personnel–and limits any long-term investments in development projects that can be taken. Kuwait’s 2022 budget allocated KWD 12.6bn (about USD42bn) for salaries and benefits, or 55per cent of its total expenditure.
“With high population growth and limited options in the private sector, the wage bill has become unsustainable in some GCC countries, as it is a large part of government spending and
of the economy overall,” saidIssam Abousleiman, World Bank Regional Director for the GCC. (World Bank Group, 2021)
With the Dubai Expo, 2022 being an example of the regional growth trajectory representation of the GCC, development finance plays a significant role in offering long-term diversification solutions for the GCC. Regional governments in the GCC are putting in place policies and developing incentives to attract investors, including tax deferrals/exemptions. UAE’s Energy Strategy 2050 and Saudi Arabia’s Vision 2030 reflect the region’s long-term paper plans to diversify their energy sourcing. However, current fiscal and labour market challenges create a significant barrier in long-term targets and maximisation of resource utilisation for diversification projects. Therefore, policy reformulation and effective fiscal planning are essential in ensuring that the GCC secures a future of progressive development in the dynamic Global South.
Hussain, M. (2022, January 24). Gulf economies to grow faster in 2022, oil price fall biggest threat. Reuters. Retrieved from https://www.reuters.com/markets/asia/gulf-economies-grow-faster-2022-oil-price-fall-biggest-threat-2022-01-24/
Gulf economies to grow faster in 2022, oil price fall biggest threat. Reuters. Retrieved from https://www.reuters.com/markets/asia/gulf-economies-grow-faster-2022-oil-price-fall-biggest-threat-2022-01-24/
What is development finance? CDFA. (n.d.). Retrieved February 25, 2022, from https://www.cdfa.net/cdfa/cdfaweb.nsf/pages/df.html
World Bank Group. (2021, December 1). GCC returns to growth amid high oil prices and strong responses to covid-19 but large wage bills threaten its economies. World Bank. Retrieved February 23, 2022, from https://www.worldbank.org/en/news/press-release/2021/11/30/gcc-returns-to-growth-amid-high-oil-prices-and-strong-responses-to-covid-19-but-large-wage-bills-threaten-its-economies
World economic outlook update, January 2022: Rising Caseloads, a disrupted recovery, and higher inflation. IMF. (n.d.). Retrieved February 25, 2022, from https://www.imf.org/en/Publications/WEO/Issues/2022/01/25/world-economic-outlook-update-january-2022#:~:text=Globalper cent20growthper cent20isper cent20expectedper cent20to,inper cent20theper cent20twoper cent20largestper cent20economies.
The opinions expressed in this article are those of the author (s). They do not purport to reflect the opinions or views of the Jindal Centre for the Global South or its members.